Geithner dismisses Toomey's ideas

Wasting no time, Treasury Secretary Timothy Geithner fired back a letter to Sen. Pat Toomey Thursday, bluntly telling the Pennsylvania conservative that his legislative ideas on the debt ceiling crisis are “unworkable” and “quite harmful if enacted.”

Such a fast response to the freshman senator, just a day after a Toomey letter to Geithner angrily challenging Treasury truthfulness, testifies to the sensitivity of the debt issue and the war of words—and politics — over what constitutes default if Congress fails to act.

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With his “ Full Faith and Credit Act,” Toomey is arguing that Treasury could delay default by simply “prioritizing” payments from available funds and ensuring that bondholders get the principal and interest payments due them. The idea has won a following in the Republican Study Committee in the House, and some in the GOP leadership worry that it could lull the large Republican freshman class into believing that Congress can avoid raising the debt ceiling this spring without risk to the United States in world markets.

Treasury is now predicting that it will exhaust its borrowing authority between early April and May 31, after which it can take some steps to buy more time. But Congress must act or risk default.

“We understand that you define default narrowly in this context to apply only to debt service payments,” Geithner writes Toomey, “But the term is equally applicable to the broad failure contemplated in your legislation to meet other important U.S. obligations. That is how it would be regarded by global markets.”

“A simple analogy may help illustrate the problem” the secretary writes, suggesting the tone of a teacher addressing a confused pupil.

“A homeowner could decide to ‘prioritize’ and continue paying monthly mortgage payments, while opting to cease paying other obligations, such as car payments, insurance premiums, student loan and credit card payments, utilities and so forth. Although the mortgage would be paid, the damage to that homeowner’s creditworthiness would be severe.”

“Similarly, while your legislation seeks to ensure that debt service payments would continue to be made after the debt limit is reached, it does not protect from non-payment the other obligations of the United States, such as military and civilian salaries, tax refunds, contractual payments to individuals and businesses for services and goods, and many others. If payment of these obligations were abruptly stopped, the world would recognize it as a first-ever failure by the United States to meet its commitments.”

“Again while the Treasury cannot support your legislation,” Geithner concludes, “I know it is well intentioned and I would be pleased to discuss this issue with you further in support of our shared objective of ensuring that the full faith and credit of the United States is never called into question.”

When POLITICO asked the senator’s office if it wanted to respond, Toomey countered Friday:

“With all due respect to the Treasury Secretary, the Full Faith and Credit Act seeks to undo the damage being caused by the alarmism coming from some in the administration, including the Secretary’s own department,” the senator said. “The most irresponsible thing we can do is continue to raise the debt ceiling without reining in spending. We have to use this as an opportunity to bring federal spending under control and force the government to start living within its means.”